Taking a Financial Position in Your Opponent in Litigation

108:12 American Economic Review 3626 (2018)

39 Pages Posted: 17 Feb 2016 Last revised: 8 Jun 2021

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Date Written: June 21, 2018

Abstract

Before filing suit, a plaintiff can take a financial position in a defendant firm. A short position benefits the plaintiff by transforming a negative expected-value claim into a positive expected-value one and by enhancing the claim’s settlement value. If the capital market is less than strong-form efficient, the plaintiff also benefits directly from the decline in the defendant’s stock price. When the defendant is privately informed about the case’s merits, bargaining failures can arise. While aggressive short-selling benefits the plaintiff at the expense of the defendant, moderate levels of short-selling can benefit the defendant and raise the settlement rate.

Suggested Citation

Choi, Albert H. and Spier, Kathryn E., Taking a Financial Position in Your Opponent in Litigation (June 21, 2018). 108:12 American Economic Review 3626 (2018), Available at SSRN: https://ssrn.com/abstract=2733710 or http://dx.doi.org/10.2139/ssrn.2733710

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

HOME PAGE: http://www.law.umich.edu/FacultyBio/Pages/FacultyBio.aspx?FacID=alchoi

Kathryn E. Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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